Q3FY23 Review: Zee Entertainment: The perfect storm

14 Feb 2023 , 10:54 AM

Zee’s Ebitda, after removing Rs584mn catch-up revenue from Siti, declined 42% YoY — worse than our est. of 35% decline. The reported PAT declined 91% to Rs243mn on multiple one-off charges related to Essel Group entities. Cash, as at end-Q3, came off to Rs6.7bn from Rs9bn QoQ due to dividend payout, with 3Q FCF turning marginally positive (M9FY23 FCF: -Rs3.4bn). The NCLT hearing on Zee-Sony merger is on 14th Feb. 

Zee’s reported Ebitda decline of 30% was boosted by Rs584mn catch-up revenue from Siti Networks. Ad revenue declined 16% YoY, while underlying domestic subscription revenue grew 3%. Zee took Rs1.69bn exceptional charges split as Rs0.69bn merger-related costs and Rs1bn pertaining to stress at Essel Group entities (Siti and Zee Learn). While ZEE5 saw 33% YoY revenue growth, its Ebitda loss was the highest ever.

Key takeaways from the earnings call: 1) Overall ad-spending environment remains soft. 2) Zee expects subscription revenue boost from NTO 3.0 to be in healthy single digits. 3) ZEE5 ad revenue is minuscule but should improve, as DAU-to-MAU conversion ratio improves to 15-18% from the current ~10% (almost static for five quarters). 4) The company targets 40:60 ad-to-subscription revenue ratio for ZEE5 in the long run. 

Analysts at IIFL Capital Services expect Q4 to be another weak quarter considering the subdued ad-spending environment and Zee’s slow progress in recouping market share in key markets. FY24 should see some benefit from the improvement in ad revenue and NTO 3.0 implementation. They cut FY23 EPS by 32% while maintaining FY24/25 EPS.

Analysts at IIFL Capital Services maintain buy with target price of Rs 286.